Question

1.Consider portfolios that can be formed using the stock X and Y with the necessary information in the following table. The risk-free rate is 1%. Determine the Sharpe ratio of the portfolio with the weight of 0.6 on X and 0.4 on Y.

	RETURN ON X (%). RETURN ON Y (%)
MEAN	6 10
STANDARD DEVIATION	8 12
CORRELATION	0.2

Answer 1

Expected return of portfolio = (60% × 6%) + (40% × 10%)

= 3.60% + 4.00%

= 7.60%

Expected return of portfolio is 7.60%.

Now, Sharpe ratio = (Portfolio Return - Risk free rate) / Standard deviation

= (7.60% - 1%) / 7.44%

= 6.60% / 7.44%

= 0.89

Sharpe ratio is 0.89.